Capital Power's (CPXWF) CEO Brian Vaasjo on Q2 2016 Results - Earnings Call Transcript

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Capital Power Corp. (OTC:CPXWF)

Q2 2016 Earnings Conference Call

July 25, 2016 11:00 AM ET

Executives

Randy Mah - Senior Manager of Investor Relations

Brian Vaasjo - President and CEO

Bryan DeNeve - Senior Vice President, Finance and CFO

Analysts

Linda Ezergailis - TD Securities

Rob Hope - Scotia Bank

David Quezada - Raymond James

Andrew Kuske - Credit Suisse

Ben Pham - BMO Capital Markets

Paul Lechem - CIBC World Markets

Robert Kwan - RBC Capital Markets

Patrick Kenny - National Bank Financial

Steven Paget - FirstEnergy Capital

Jeremy Rosenfield - Industrial Alliance Securities

Presentation

Operator

Welcome to Capital Power's Second Quarter 2016 Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, the conference will be opened for questions. This call is being recorded today July 25, 2016.

I will now turn the call over to Mr. Randy Mah, Senior Manager, Investor Relations. Please go ahead.

Randy Mah

Good morning. And thank you for joining us today to review Capital Power's second quarter 2016 results which were released earlier this morning. The financial results and the presentation slides for this conference call are posted on our website at www.capitalpower.com. We will start the call with opening comments from Brian Vaasjo, President and CEO and Bryan DeNeve, Senior Vice President and CFO. After our opening remarks, we will open up the lines to take your questions.

Before we start, I would like to remind listeners that certain statements about future events made on this conference call are forward-looking in nature and are based on certain assumptions and analysis made by the company. Actual results may differ materially from the company's expectations due to various material risks and uncertainties associated with our business. Please refer to the cautionary statement on forward-looking information on slide number 2.

In today's presentation, we will be referring to various non-GAAP financial measures as noted on slide number 3. These measures are not defined financial measures according to GAAP and do not have standardized meanings described by GAAP and therefore are unlikely to be comparable to similar measures used by other enterprises. Reconciliations of these non-GAAP financial measures can be found in the second quarter 2016 MD&A.

I will now turn the call over to Brian Vaasjo for his remarks starting on Slide 4.

Brian Vaasjo

Thanks Randy. I'll start off with a quick review of our highlights for the second quarter. Capital Power delivered strong financial performance in the second quarter that exceeded management's expectations. This included achieving normalized earnings per share of $0.30 and generating $106 million in funds from operations. Bryan will provide more details in his financial review.

We continue to be engaged with the Alberta government to ensure a fair compensation for the accelerated closure of coal-fired units by 2030 under the Climate Leadership Plan. The discussions with the coal facilitators are on-going. We expect the Alberta government to provide more details on the implementation of the Climate Leadership Plan in the third and fourth quarters of this year.

Turning to Slide 5. Capital Power's Board of Directors has approved $0.10 per share increase in the annual dividend; effective with the third quarter 2016 dividend, the quarterly dividend will increase 6.8% to $0.39 or $1.56 per share on an annual basis. This represents the third consecutive $0.10 per share annual increase. The annualized dividend has now grown 24% since 2013. Our current projected cash flow supports the annual dividend and growth guidance to 7% that we discussed at our Investor Day last December.

Moving to Slide 6, this slide summarizes the plant availability, operating performance of our plans for the second quarter of 2016 compared to the same period a year ago. We had a strong operational performance in the second quarter with average plant availability of 90%, unchanged compared to the second quarter of 2015.

We completed a major schedule outage of Genesee 2 which reduced overall plant availability. The Genesee 2 planned outage was completed in a shorter timeframe and with lower cost than anticipated. At Joffre, we had reduced availability of 55% due to the planned and unplanned outages. We also improved performance at Shepard this quarter of 82% compared to 73% in the second quarter of 2015. I'll now turn the call over to Bryan DeNeve.

Bryan DeNeve

Thanks, Brian. Starting on Slide 7, I would like to review our second quarter financial performance. We generated $106 million in funds from operations and normalized earnings per share of $0.30. Both of which were better than our expectations. Due to excess supply, low natural gas prices and conservative offer strategy from market participants, Alberta power prices in the second quarter averaged $15 a megawatt-hour compared to $57 a megawatt-hour in the second quarter of 2015. Despite this 74% year-over-year decline in average power prices, our trading desk captured a 307% higher realized average price of $61 a megawatt-hour on our Alberta commercial assets versus the average spot price.

We continue to see significant value from portfolio optimization activities as illustrated on slide 8. The chart shows a strong track record of performance from our trading desk. The orange line in the chart represents Capital Power's realized price on our Alberta baseload asset for managing our exposure to commodity risk and reducing volatility. As you can see, Capital Power's average realized price on its baseload facility has exceeded the spot price by 10% on average since the company's inception seven years ago. So we continue to see consistent material value creation from our portfolio optimization activities.

Turning to Slide 8, I'll review our second quarter financial results compared to the second quarter of 2015. Revenues were $229 million, up 176% from second quarter 2015, primarily due to strong portfolio optimization revenues. The portfolio was fully hedged which contributed to a realized price of $61 a megawatt-hour compared to an average realized price of $46 in the second quarter of last year. Adjusted EBITDA before unrealized changes in fair values was $123 million, up 31% from the second quarter of 2015, primarily due to strong portfolio optimization performance. Normalized earnings per share of $0.30 increased 200% compared to $0.10 a year ago. As mentioned, we generated funds from operations of $106 million in the second quarter, which is up 51% on a year-over-year basis.

Turning to Slide 10, I'll quickly cover our financial results for the first half of 2016 compared to the same period in 2015. Overall, the financial results in the first half of the year show improvement across all measures. Revenues were $570 million, up 29% year-over-year, primarily due to unrealized changes in fair value of market commodity derivatives and emission credits. Adjusted EBITDA before unrealized changes in fair values was $251 million, up 20% from a year ago due to higher EBITDA contributions from the Alberta Commercial Plant and portfolio optimization segment and a full quarter from K2 Wind that began commercial operations in late May 2015. Normalized earnings per share were $0.63 on year-to-date basis in 2016, up 58% compared to $0.40 a year ago. Funds from operations were $215 million for the first half of 2016, which is up 21% on a year-over-year basis.

I'll conclude my comments with a review of our Alberta Commercial Hedging profile on slide 11. The termination of our Buyer role under the Sundance C PPA combined with additional sales in the forward market has significantly increased our baseload hedging profile since 2015 year end. The table on the slide shows a quarter-over-quarter comparison from Q1, 2016. For 2017, there were no changes and we continue to be fully hedged at an average contracted price in the mid-$40 per megawatt hour range.

In 2018, we've increased our hedges to 54% from 50% at an average contracted price in the low $50 a megawatt hour. And for 2019, we've increased our hedges to 44% compared to 34% last quarter at average contracted price in the low $50 per megawatt hour.

In summary, our baseload merchant exposure is fully hedged for this year and for 2017. And we continue to make progress and reducing our merchant exposure in 2018 and 2019.

I'll now turn the call back to Brian Vaasjo.

Brian Vaasjo

Thanks, Bryan. This, the charts on Slide 12 show our operational and financial results for the first half of this year versus the 2016 annual targets. In the first six months, average plant availability was 93% compared to our 94% target. Our sustaining CapEx was $33 million versus the $65 million annual target. We reported $108 million in plant operating and maintenance expense versus the $200 million to $220 million target. Finally, we have generated $218 million in funds from operations in the first half of the year versus the $380 million to $430 million annual target. Overall, we are on track to meet our 2016 annual operational and financial targets.

Turning to Slide 13. We have two development and construction growth targets in 2016. For Genesee 4 and 5 projects the construction may proceed once there is clarity on the impact to decisions from the Climate Leadership Plan and the resulting impacts have been assessed. Genesee 4 and 5 is also depended on receiving adequate price signal from the energy only market. As previously mentioned, we have restructured the construction execution of the Genesee 4 and 5 project which is delayed the decision point for proceeding to the fourth quarter of 2016.

On slide 14, we have growth targets outside of Alberta, which involves executing a contract for the output of a new development. As announced in the first quarter, this was achieved with our Bloom Wind project. Bloom Wind has a 10-year fixed price contract covering 100% of the output. Construction of the project is expected to start in the third quarter of this year with commercial operations targeted one year later. In addition to Bloom Wind, we are actively bidding into RFPs for other U.S. projects.

I will now turn the call back over to Randy.

Randy Mah

Thanks Brian. Operator, we are ready for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions]

The first question today is from Linda Ezergailis of TD Securities. Please go ahead.

Linda Ezergailis

Thank you. Congratulation on a strong quarter. I'm wondering and I realized there are probably some competitive sensitivities but I'm wondering if you could perhaps describe kind of the nature of the optimization leading to your performance? And whether those factors continued to be in play for the beginning part of Q3 and how that might look going forward in terms of variability?

Bryan DeNeve

So the performance in Q2, a lot of that is driven by our view of where fundamental power prices will settle in the province relative to where they are trading on a forward basis. As we look forward to Q3 and the balance of the year, we continue to see opportunities that we are looking to execute on. However, part of the outcome will depend on where prices ultimately settle.

Linda Ezergailis

Okay. That's helpful context. And then maybe on an operational note, your faster turnaround at G2, can you describe maybe how much below budget it was? How much faster it was than planned? The nature of that kind of surprise benefits that you realized in that turnaround and might be applied to other outages going forward or there something unique that was there?

Bryan DeNeve

Well, one of the elements on Genesee 2 planned outage was the impact of low pool prices. So under the power purchase arrangement we make availability incentive payments while the plant is out. So the low pool price environment was beneficial relative to what we had budgeted from that perspective. But in addition the company was able to materially reduce the expenditures during the outage and also shortened the outage duration by about 2.5 days. So it was all those factors combined, on a go forward basis our operation side of the company is looking to continually update and optimize around those planned outages.

Linda Ezergailis

Thank you. And just -- I'm just wondering with the renewable energy plan and the recommendations to the AESO have not or by the AESO to the government have not been made public. But has the government shared anything with industry stakeholders and have they given you anything in terms of updated timing or any context around even maybe when the CCR regulation consultation might begin?

Brian Vaasjo

So there are a various rumors and comments moving around the industry. The AESO, it has been confirmed has made its recommendation to government. The government has been on a schedule of making their decision in that area public near the end of the summer. Whether that's late August or early September, so we do expect decisions to be forthcoming from that perspective or at least if it results in next step at least know where those would be but do expect again decisions. When it comes to setting carbon standard that has been a little less clear in terms of timing and direction. And really don't have any new information from that perspective.

Operator

The next question today is from Rob Hope of Scotia Bank. Please go ahead.

Rob Hope

Yes. Thank you. And thanks for taking my questions. Just on the same topic regarding your conversations with the government. Can you comment on the types of discussions you are having with facilitator? Is it a two way discussion or is the facilitator mainly searching for information request at this point?

Brian Vaasjo

It's certainly a combination of both. The government is looking for information or the facilitator in the coal secretary are looking for information that's particular to various units that are involved and positioning as a company. On the other hand, certainly the discussions that we've had with their facilitator have been two way in terms of hearing some of the views of the facilitator and the secretary and what the final product would be looking like. So it has been -- it has been definitely a two way dialogue.

Rob Hope

All right. Thank you for that color. And maybe just as a follow up. Are you having discussions with the ministry or the government outside of the path through the facilitator?

Brian Vaasjo

No. We are in contact with the government on a number of other file. So we do connect with the government fairly frequently. But part of the understanding is that discussions that are taking place with the facilitator are relatively self content so there is an effort by industry to not engage the decision makers at this point in time.

Operator

The next question is from David Quezada of Raymond James. Please go ahead.

David Quezada

Yes. Thanks. Good morning, guys. Maybe just a high level kind of strategic question. I know you guys have a lot of or seem like a fair number of attractive opportunities in the US. And I realized that this event is probably somewhat unlikely but in the event that you didn't go ahead with G4 and G5 how -- have you kind of done your work on how you would adjust your strategy there?

Brian Vaasjo

Obviously that we keep that in mind and I think we've described before we've got a number of opportunities in the US and we are actually developing opportunities right now in Ontario to respond to the Ontario, the next two calls in Ontario. So in the event that Genesee 4 and 5 didn't proceed actually whether translate into for the company is more capital to spend outside of Alberta. So we are prepared to continue to ramp up those activities and still be able to deploy significant amounts of capital to -- in totally contracted projects again outside of Alberta.

David Quezada

Okay. Great, that's helpful. Thank you. And then maybe just a broader industry question. There are reports out of Germany, I believe Germany is about one third renewable power and they have to spend money to keep coal-fired plant online and have I guess phased out some of the open ended subsidies they had for renewable power. Do you see any similarities between where Alberta could be headed under the Climate Leadership Plan and where Germany is now and how that might affect things?

Brian Vaasjo

I think part of the situation in Germany is a little bit a whip-sawing in terms of bouncing from different fuel types to different fuel types quite rapidly in response to other events taking place. I think that's quite a bit different than Alberta. And the level of aggressiveness that Germany was taken versus Alberta is quite different as well. So I think what we have in front of us is Climate Leadership Plan as it relates to power generation that is aggressive yet definitely doable. And I think that's exercise that the government is going through now. And as we've said fairly openly if they implement in the directions that they seemed to be moving i.e. reqs for renewables matching roughly coal retirements with the bringing in of renewables and avoiding oversupply. And of course compensation which suggest reasonable level of risk for investors in Alberta. The Climate Leadership Plan can definitely be implemented in a very reasonable way without there being significant cost to consumers or/and with very positive environmental outcome. So it's all capable of being implemented properly without any substantive disconnects in the marketplace.

Operator

The next question is from Andrew Kuske of Credit Suisse. Please go ahead.

Andrew Kuske

Thank you, good morning. I guess the question just around the negotiations, when you're entering into more duration for contracts and new contracts looking out in the next few years. Has there been any fundamental change in buyer behavior or just the nature of the conversations, given some of the uncertainty that exists just from a regulatory standpoint in Alberta?

Brian Vaasjo

So in Alberta there certainly is a different tone in terms of where industrial tend to be at this point in time. The uncertainty that they face is again very similar to uncertainty we face in terms of where power prices are going, carbon tax and so on. And of course you are in an environment today of very low power prices. So there is a number of things that is have kept the-- I'll call it in industrial and C&I side probably a little bit slower than you'd otherwise like to see.

Andrew Kuske

So in the event that we actually saw more robust power pricing environment, would you anticipate greater ease in effectively lifting the forward numbers higher on a percentage basis, thereby having more stability in your book?

Brian Vaasjo

Yes. We'd see greater opportunity for longer term contracts with the industrial.

Andrew Kuske

And then one final question just on the dividend increase. So it meaningful on a per-share basis, small on a total cost to the overall organization. How do you think about just that dividend as really low cost but a meaningful return to shareholders? And then comparing that versus capital deployment opportunities and building new things?

Brian Vaasjo

Well, I think just as you commented in terms of our view of these dividend increases as we go forward relative to our free cash flow is relatively modest. And certainly don't see it in any way, shape or form precluding what we can do in terms of out growth perspective. But I think as we've said a number of times we see dividend growth is being very significant component of increasing shareholder value. And we'll be continuing on that path.

Operator

The next question is from Ben Pham of BMO Capital Markets. Please go ahead.

Ben Pham

Okay. Thanks. Good morning, everybody. I wanted to go back to the question on the quarter and the portfolio optimization and the revenue generation that you booked there for the quarter and the good result there. And I'm just wondering are you able to perhaps breakout in terms of the magnitude year-over-year, the benefit on your physical book on the hedges versus perhaps the Sundance being short on that coming into the quarter?

Bryan DeNeve

So we look at our Alberta Commercial portfolio sort of as in one entire portfolio. And our decisions are always interrelated so certainly with Sundance PPA moving back to the balancing pool that had changed shifted our overall position. But certainly we continue to look at optimizing from that perspective forward. So we don't delineate necessarily the Sundance fact separately what we are doing in the rest of our portfolio. So I guess the short answer Ben is, no, we don't breakdown out separately.

Ben Pham

Okay. Maybe perhaps can you comment on your sensitivity to pricing? Is it still $1 million in EBITDA is about $1?

Bryan DeNeve

Yes. So certainly when you look over the medium term, that sensitivity to movement in forward prices is less without the Sundance link in our portfolio. But also in addition to that, the fact that we've entered into a lot of forward sales over the first half of 2016, obviously, that's also dramatically reduced our sensitivity to power price in Alberta.

Ben Pham

Okay, thanks for that. I wanted to switch over more a follow up on the consultations that you're having on the stranded cost. I'm wondering is there any progress on whether there's any sort of agreement on how you and perhaps the government may be looking to calculate the book value.

Brian Vaasjo

Well, I mean there is sort of ongoing discussions on all fronts to get into the particulars would not be appropriate at this point. But I think it's safe to say we continue to be optimistic with the outcome and there is nothing happened that would shake our optimism as to where the government would and should end up.

Operator

The next question is from Paul Lechem of CIBC World Markets. Please go ahead.

Paul Lechem

Thank you, good morning. Just curious about your contracted prices for 2018 and 2019. On your current hedge position, it's in the low $50s for both those years. I'm just wondering how you think about that, given the introduction of the carbon tax in 2018. And is the low $50s sufficient enough for you to be able to recover all your costs and actually make a profit on your commercial coal units at that point? I guess I would've thought that you'd actually have a bit of a higher price come 2018, especially given on the commercial position you will be paying the carbon tax at that point.

Bryan DeNeve

So in terms of the carbon tax, in the case of Genesee 1 and Genesee 2, that's an obligation that flow through to the buyer, so the balancing pool. Our obligation then is limited to our interest on Keephills 3 and Genesee 3. When we look at forward prices in Alberta, it is anticipated that those forward prices build in the impact the carbon tax will have on power prices in the Alberta market. So as you can see on slide 11 that we walk through forward prices in 2018 are currently $47, in 2019, $52. So certainly an increase over what we are seeing for forward prices in 2017. We see that as a combination of two things, Paul. One is the fact that the impact of carbon prices will start to be reflected in bidding behavior. But also tightening in the Alberta market that will result in higher prices. For us, when we look at the overall profitability of our units with the higher at Keephills 3 and Genesee 3, we do want to keep in mind the fact that we have a large inventory of GHG offset that we put together and procured over time. And certainly we've been able to procure those offset to prices a lot materially below where we see the carbon tax or carbon price setting in 2018 and 2019.

Paul Lechem

I got you. And what's your view come 2018, there are other units in the market which will become merchant -- what's your view of economic -- of competitive potentially shutting down coal facilities for economic reasons, maybe not regulatory reasons? But given current forward prices of $46, it might not be sufficient to fully recover costs. Do you have a view on other retirements that might be happening in the market at that point in time?

Bryan DeNeve

We look at what we've seen happening to other older coal- fired units in the Alberta market that have become merchant. So the recent examples would be the Battle River 3 and Battle River 4 units. We've seen quite a material change in how those units are offered into the market and their operational profile. So when we look at other units have the PPA ending, we would expect probably similar changes to occur.

Paul Lechem

Okay. Last question, the bidding behavior of the balancing pool, do you expect them just to continue bidding in capacity on the PPAs somewhat indiscriminately through the balance of the year? Or do you anticipate any change in their actual dispatch behavior?

Bryan DeNeve

When we look at the PPAs that are held by the balancing pool. Our expectations are that some of those PPAs, the balancing pool will make the decision to terminate the PPA. So economically to make payment for the termination in which case those PPAs will go back to the original owners. Once it's in the hands of original owners, we expect that there will be different economic decisions and bidding decisions made for those units.

Paul Lechem

Do you have any sense of when they might make those decisions?

Bryan DeNeve

No. Not at this point.

Paul Lechem

But you might expect it to happen sometime this year?

Bryan DeNeve

Potentially later this year early next year.

Operator

The next question is from Robert Kwan of RBC Capital Markets. Please go ahead.

Robert Kwan

Good morning. You spoke about bidding on RFPs in the US, and then referenced earlier on the call Ontario. I'm just wondering outside of kind of Greenfield growth, can you just comment on what you're seeing in the M&A market? We've seen pretty good valuations for renewables and contracted. And are you seeing any opportunities to acquire? And with those high valuations, are you actually looking at divesting anything?

Brian Vaasjo

So in terms of what we are seeing out there, there is -- there are a number of groups of assets and single assets that have come on and are coming in. We anticipate coming on to the market. There are substantially contracted in nature, certainly a lot of them have a significant amount of appeal to us. On the other hand, we find our cost to capital a bid of challenge to compete, there is a lot financial players in the market who with different strategies or have effectively significantly lower cost to capital are able to certainly outbid us. So, again, we look at a number of them. Don't pursue them very far simply because of again cost to capital out there again pristine project is pretty down and low. On the other hand, there are from time to time opportunities that come by that are little potentially a little bit different in nature, may have risks that we can manage, whereas others might not that somewhat levels a playing field a little bit. So there are some opportunities out there. And again we look at a couple but certainly not the large number of opportunities that are out there today.

Robert Kwan

Okay and I guess just with what seems like cost-of-capital shootouts for high quality contracted assets, would you be looking to divest anything into those valuations?

Brian Vaasjo

No. Because we don't see that necessarily some of those valuations would necessarily drop. A, don't have current significant need for capital demand and points in time as we demonstrated in the past when we are looking at large levels of capital investments we will look at as part of the decision on capital allocation whether or not it's appropriate or not to divest of an asset.

Robert Kwan

Understood. If I can just ask some questions here on your hedges. First, just specific on the quarter -- were there any hedges that were set to expire in future quarters that you monetized or settled and brought the game back into this quarter?

Brian Vaasjo

No.

Robert Kwan

Okay. And then, as you look out to 2017, you've got 100% hedged for baseload. Are there any other Alberta hedges that you have not allocated to the baseload plants?

Bryan DeNeve

Yes. So there is 100% the percentage at length from our baseload plant that we've sold forward. You are correct there are other forward sales that we have done that would be -- you can match up against our non baseload facilities.

Robert Kwan

Okay. Maybe specifically, just with the hedges that would've been -- and I know you don't color code them but let's for argument's sake, say as allocated to the Sun C PPA -- would those then get reflected in a number that's greater than 100% in terms of the baseload? Or does that essentially just migrate over to the trading book?

Bryan DeNeve

Yes. Effectively when the Sundance C PPA moves back, what that did was removed or reduced the amount of baseload length we had. So effectively it would increase that percentage sold forward as in total number.

Robert Kwan

Okay and then last question. As you look out to 2018, 2019, the hedges are up a bit. And I'm just wondering is that because of any generation assumptions going down? Or is it just that you're seeing good value in the forward prices that you locked in?

Bryan DeNeve

Yes. That sold to forward sales that we've entered into that we felt were -- as you characterized a good value relative to where we think the actual power prices will settle in Alberta.

Operator

The next question is from Patrick Kenny of National Bank Financial. Please go ahead.

Patrick Kenny

Yes, good morning. Just on G4 and G5 with the decision point in Q4 -- if for some reason they don't get full clarity on the CLP by year end, can you remind us if there is flexibility within the contract to continue pushing out the FID date without seeing too much change on the capital-cost front?

Brian Vaasjo

Yes. There are continuous to be flexibility on moving out the date. Where we are losing flexibility is on the completion date. We've sort of pushed compressed to front end pretty close to as far as we can go. Again, without having shift in the back end. In terms of cost, they are ends up being modest escalation in the contract with the Mitsubishi and again not significant.

Patrick Kenny

Okay. And so just to be clear on the in-service date: in order to reach 2020 in-service date, when does the final FID date have to be reached by?

Brian Vaasjo

So without any significant further work, our expectation is that around the fourth quarter of this year.

Patrick Kenny

Okay. And then maybe just back on Ben's question related to the Sundance PPA termination: in the contingent liability section, does that estimated loss of $13 million include any benefit that's been accrued by your trading desk here since March 24?

Bryan DeNeve

Yes. That number, what it reflects is if the effective date of the termination are us pushing back to PPA, if that got delayed out passed the end of the second quarter. That would be the projected impact on our financial results. And bulk of that of course is related to Q2.

Patrick Kenny

Okay, but again does that include any benefit from your trading desk within Q2?

Bryan DeNeve

No.

Operator

The next question is from Steven Paget of FirstEnergy Capital. Please go ahead.

Steven Paget

Good morning and thank you. My first question is on Shepard. Do you have a target availability rate on Shepard? And is the operator liable to pay you penalties if that target is not met?

Bryan DeNeve

There is definitely a target availability number that consistent for a new large scale combined cycle unit. And in terms of our off-take agreement within ENMAX, there are targets and incentive built in.

Steven Paget

Thank you. My second question is on Genesee 1 and 2. On a directional basis, what do you expect free cash flows from these facilities to look like post the expiry of the PPA in 2020?

Bryan DeNeve

So the revenue we currently received under the Genesee 1, 2 PPA is roughly $37 a megawatt hour. So when we look at post 2020 once PPA expire, we will be selling that output into the Alberta merchant market and we are seeing forward prices in that for that year in the $60 to $61 range. So we definitely see -- foresee a material increase in the revenue from the Genesee 1 and 2 units. Now part of that will be offset by the fact that at that point we also take on the obligation of the carbon tax. So that will partially offset that revenue increase.

Steven Paget

But even with the carbon tax, you expect higher cash flows?

Bryan DeNeve

That's correct.

Operator

[Operator Instructions]

The next question is from Jeremy Rosenfield of Industrial Alliance Securities. Please go ahead.

Jeremy Rosenfield

Thanks. Good morning. Let me be brief, just a couple of questions. First, on the hedging -- and I am thinking here more about gas hedging than on power side of things. Have you been able to take advantage of the low gas prices in the market to lock in any supply for longer periods of time, maybe to coincide with some of the hedging you're doing on the power side?

Bryan DeNeve

Yes. We look at for a gas fired units in length for those units which would include Clover Bar and Shepard, we are looking at hedging both the power component as well as the natural gas purchases. And part of the lift we've seen in this year is due to the ability of the desk to optimize around natural gas.

Jeremy Rosenfield

Okay, great. And then just a follow up on sort of the capital allocation discussion. Since you renewed, the NCIB hasn't been used. I'm just wondering if there's any particular reason, or if you do expect that you will employ the NCIB depending on where the stock price is, as you move through the year?

Bryan DeNeve

So as we've communicated in the past, our priority for capital allocation is towards growth opportunities. So the fact that we are now moving forward with Bloom project. That's our prime location for a capital. And also as we look forward and see some of these questions get answered on the Climate Leadership Plan in the prospect to G4 and G5 moving ahead. That also be driving a need for capital. So given that growth it's underway, at this point we don't anticipate purchases under the NCIB.

Operator

This concludes the question-and-answer session. I'd now like to turn the call back over to Mr. Randy Mah for closing remarks.

Randy Mah

Again thank you for joining today and for your interest in Capital Power. Have a good everyone.

Operator

This concludes today's conference call. You may now disconnect your lines. Thank you for participating. And have a pleasant day.